5 Crucial Things to Know About Business Valuation

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It is no secret that when you own a small business, there will be at least one time where you will need to get your business valued. Obtaining a business valuation can seem complicated at first, but there are many business valuation services that can help to streamline the process. But before you get started, here are five things you need to know about acquiring a business valuation analysis.

1. Why is a business valuation needed?

A small business will need business valuation for a number of reasons, from a startup knowing how much to offer to investors, to providing routine updates to stakeholders, to knowing how much the business is worth if you are considering selling it, and/or just knowing for peace of mind.

2. There are business valuation standards that you must adhere by

There are multiple business valuation firms that have set standards like the Institute of Business Appraisers, American Society of Appraisers, and
Uniform Standards of Professional Appraisal Practice.

3. How is the value determined?

Generally, your business valuation analysis has three parts.

Income approach. Compares the expected investment value against the required return for assuming the risk. This includes changes in revenue, capital needs, and financing differences per year.

Market approach. Compares your company to others that are similar and already established.

Asset approach. Typically only used for under performing companies, this assess the company’s fair market value.

4. How often must you invest in business valuation?

A business valuation report is only valid for a specific date and time. So it technically will not expire, but it will change as the market fluctuates. Because of this, it is a good idea to get a business valuation analysis done every quarter in order to get an accurate report.

5. What do you need to perform an accurate business evaluation?

You will need some paperwork to perform this task including:

profit and loss statements

balance sheets

tax returns from the past five years

interim loss profits and balance sheets for the current year

copies of projected gross income for the upcoming year

So keep these five steps in mind, and your business valuation will be smooth sailing! If you have any questions or require help, make sure to contact an experienced business valuation firm as soon as possible!

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